In 2022, everyday prices, including food, housing, and gas, have seen significant increases. Food prices in the United States have risen by about 10% compared to 2021, with some reports of takeout food costs surging by as much as 30%. Housing has also climbed by an additional 10%, primarily due to the longstanding housing shortage. The U.S. has needed to produce 1.5 million homes annually for over a decade but has failed to meet that demand, even in a stable economy. With supply chain disruptions and raw materials taking up to six months longer to ship, housing prices are likely to remain sticky.
Furthermore, many individuals and corporations refinanced their mortgages in 2020 at ultra-low 2.5% interest rates. With current rates rising, there is little incentive for people to sell or move out of existing homes. As new buyers struggle with affordability, demand for rental properties is set to rise. Additionally, the Federal Reserve’s interest rate hikes are increasing borrowing costs for landlords using HELOCs, who in turn pass these costs onto tenants. On top of this, oil prices, which briefly went negative in 2020, are now at unsustainable levels, compounding the financial strain. This combination of factors—higher prices for food and housing, rising borrowing costs, and tightening corporate budgets due to fears of a recession—creates a challenging environment for consumers. A historical comparison can be drawn to when Europe adopted the Euro. Initially, countries like the Netherlands had their old currency values, but the new Euro-denominated prices were significantly higher, which led to inflationary pressure. We could see a similar pattern with real estate continuing to rise, food prices staying elevated, and gas prices returning to more normal levels in the next couple of years. As a result, employers will likely need to offer higher wages to attract talent, and countries with lower food price inflation may see a surge in immigration. It’s also important to note that when prices become misaligned, as we saw with Bitcoin in 2021, they eventually revert to the mean, following the principle of reversion. However, housing and food prices are generally more rigid, as seen during the 2008 crisis. Additionally, the M1 money supply has increased by 500% since 2020, further fueling inflation. Over time, this inflation will likely be offset by companies and consumers cutting back on spending. Prices will eventually revert to more sustainable levels, and political elections may act as a catalyst for these adjustments, leading to more stable pricing in the future.
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AuthorMichael Kelly has been working within banking technology for over a decade, and his experience spans across algorithmic trading, quantitative finance, hedge funds, private equity, and machine learning. This page is intended to educate others on the capabilities of SageFusion. ArchivesCategories
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